Call 12: Two Arizona charities face scrutiny

by Robert Anglen - Sept. 8, 2012 11:42 PMThe Republic | azcentral.com

Food for the Hungry and the Breast Cancer Society, two of Arizona's 12 largest charities, report giving tens of millions of dollars in food, medicine and medical supplies to the world's poor and needy every year.

But a Call 12 for Action investigation found that the charities engaged in questionable accounting practices and that the amount of donations they report could be misleading.

Internal Revenue Service records and interviews show that Food for the Hungry claimed its donations of medicine were worth far more than the organization paid for them, and both charities took credit for donating millions of dollars' worth of vaccines, pills and medical supplies that they did not physically collect.

Among those is $4.1 million in vaccines that the Breast Cancer Society says it gave to Ghana, Africa. The administrator of the Ghana program said Friday that the Breast Cancer Society has nothing to do with the vaccines.

The society also reported giving $38 million last year in grants, medicine and other supplies to deliver direct help to those suffering from the disease.

Food for the Hungry reported spending $83 million in 2010 on disaster relief and long-term development projects as part of its mission to eradicate poverty.

The IRS, in an audit, this year accused Food for the Hungry of overvaluing goods "to mislead the public in order to raise more funds." The IRS fined Food for the Hungry $50,000 for misrepresenting the value of medicine it said it donated.

Food for the Hungry said its numbers are accurate, and the non-profit is challenging the audit findings.

The Better Business Bureau warned in a bulletin last year that the Breast Cancer Society uses most of its cash to pay professional fundraisers' fees, employee salaries and administrative costs.

The BBB and the American Institute of Philanthropy say that the Breast Cancer Society uses donations of medicine and other goods to give the illusion of financial efficiency. In reality, the watchdog groups say, very little goes directly to charitable work.

One method used by the charities involves transferring donations on paper from one charity to another with no goods physically changing hands.

Charity watchdog groups have expressed concern about the prevalence of this practice in the non-profit industry. The goods, called gifts-in-kind, are any non-cash items such as medicine, books, clothes, food or other supplies.

In exchange for a shipping or processing fee, one charity will transfer the gifts-in-kind to another charity on paper. On paper, the gifts-in-kind are worth millions. The charities will book the entire value of the gifts-in-kind as revenue and then record it as a "donation" when it is sent to another agency.

The transfers enable charities to pay a few thousand dollars and take credit for "donating" millions of dollars of gifts-in-kind that they had no part in collecting or distributing. In some cases, multiple charities take credit for donating the same shipment of items to a single destination.

Officials for both charities deny any wrongdoing and say their methods for calculating values on donated goods are based on generally accepted accounting practices. They say they follow rigorous industry standards for shipping and distributing donated goods.

Food for the Hungry Global Executive Officer Marty Martin said in a statement that his agency helps donors maximize donations "by giving the few cents needed to ship valuable critically needed supplies ... and bringing hope and help to many children and families experiencing grinding poverty."

The Breast Cancer Society President James Reynolds II said in e-mails Friday that his organization "strives for excellence in reporting our activities in accordance with generally accepted accounting principles."

He strongly denied "any suggestions, innuendos or intimations that these shipments did not exist" or that the Breast Cancer Society did not own the gifts-in-kind. Reynolds said each international shipment includes letters from the donor, bills of lading showing the charity shipped the goods and a signed letter from the recipient organization.

The amount of donations made by charities is critical to their bottom line. The more a charity claims that it gives, the more it can spend on salaries and other expenses, such as travel and conferences, without raising red flags among groups that rate non-profits based on administrative-expense ratios.

Non-profit experts say by exaggerating values and taking credit for donations that they did not collect or distribute, charities can make administrative-expense ratios seem low so that the charities appear to be more efficient in their use of money.

Many people decide whether to donate to a non-profit based on published percentages of expense ratios.

Most financial information about charities comes from IRS "990" reports, the non-profit equivalent of tax returns, that charities file annually. The reports document revenue and expenses and include summaries about donations.

Recent crackdowns by the IRS and warnings by charity watchdog groups have prompted new industrywide accounting rules and new methods on how to value donated goods.

Last month, Charity Navigator, one of the nation's leading charity-rating groups, sent letters to charities advising them to recalculate the value of gifts-in-kind or risk a lower rating.

Records show that Food for the Hungry, which is based in Phoenix, and the Breast Cancer Society, which is based in Mesa, took credit for donations of medicine collected and distributed by other charities. They paid thousands of dollars to help process these shipments, then reported on IRS forms that the medicine was worth millions of dollars and claimed the full value of the donation.

Records also show that Food for the Hungry paid pennies apiece for pills that it once reported were worth more than $10 each. The charity now reports the pills are worth about $1.54 each. The non-profit's own website indicates the pills can be purchased for 5 cents.

Critics say the system needs to change because it fails to give everyday donors a true picture of what some non-profits actually do.

"It's like having Grandma give you a $10,000 car. First you said it was worth $5 million and now you are saying it is worth $750,000," said Luke Hingson, president of Brother's Brother Foundation in Pittsburgh, who for years has fought to curb the markup of gifts-in-kind. "It's still only worth $10,000."

Based on most recent IRS filings for the period Oct. 1, 2010-Sept. 30, 2011.

Breast Cancer Society

Headquarters: 6859 E. Rembrandt Ave., Suite 128, Mesa

Founded: 2007

Mission: Provide relief to those who suffer from the effects of breast cancer; work with and give support to other personnel, individuals and organizations that share in the goal of helping cancer patients, the critically ill, and the impoverished.

Veronica Sanchez, Dave Cherry and Robert Anglen lead the Call 12 for Action team. Call 12 for Action has a team of trained volunteers working to help people resolve disputes with companies. Last year, Call 12 helped recover more than $1 million for customers.

Here to help

If you have a problem with a business you would like us to investigate, contact Call 12 for Action.

By phone: Volunteers take calls from 11 a.m. to 1 p.m. Monday through Friday at 602-260-1212.